Oil vs electricity: which will prevail?

Oil faces three challenges that together may be insurmountable, writes energy expert Fereidoon Sioshansi. Electricity’s fortunes on the other hand are on the rise. Courtesy EEinformer.

Oil vs. electricity? What an odd comparison. The two are totally separate and unrelated forms of energy – with the possible exception of a few places where oil is still burned to generate electricity, such as in Saudi Arabia.

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Moreover, the first reaction of most people is to acknowledge the disproportionate dominance of oil relative to electricity in terms of supplying the bulk of current global energy demand – electricity accounts for less than 20 per cent of final energy consumption globally, half that of oil.

But oil’s continued supremacy is no longer assured.

Big oil is still big and will remain big for a while longer. But it is not as big as it used to be, relatively speaking. Nor is the demand for oil steadily growing as it did for decades.

Moving forward, demand for electricity is growing at a much faster rate than that of oil – a trend that will make electricity’s share of final global energy consumption match or exceed that of oil by 2040, if not sooner.

It already is in a number of countries. Not surprisingly, there are those who conclude that oil’s best days are history.

Why would anyone say that? There are at least 3 powerful reasons:

First, competition from electric vehicles (EVs) and electrified transportation is expected to eat into the most profitable portion of the oil business by reducing demand for gasoline & diesel;

Second is the continued pressure to reduce carbon emissions as the global economic system is slowly but surely transitioning towards low carbon energy resources – abundant and increasingly cheap renewables; and

Third is that investors and insurance companies – including several large managed funds – are beginning to think seriously about reducing their risk exposure to climate change – which is not good for any business with a heavy carbon footprint.

These trends are likely to gain momentum almost regardless of what the politicians, including the Trump Administration, think, say or do and – even more astonishingly – will not be significantly affected by the rise or fall in price of oil.

Elon Musk

The future of energy is slowly, but surely, moving towards electricity, with more of it generated from zero-carbon renewable resources.

Why would anyone come to such a conclusion?

The first clue comes from Saudi Arabia’s Sovereign Wealth Fund, which has reportedly bought roughly 5 per cent of Tesla and apparently has had conversations with Tesla’s CEO Elon Musk for even larger investments in the electric automaker.

Why would the world’s largest oil exporter – whose economy is totally dependent on oil – invest in an American EV manufacturer?

Second clue comes from traditional auto companies, including latecomers such as General Motors (GM). Not only have they belatedly joined the ranks of EV enthusiasts who see the future of transport to be electric, but increasingly autonomous EVs or AEVs.

Just in the past couple of years GM, Ford and others have invested heavily in ride-hailing business – in the case of GM $500 million in Lyft followed by $581 million in Cruise Automation. In May 2018, Soft Bank’s Vision Fund said it would invest $2.25 billion in GM’s AEV effort.

Imagine a future in a renewable-rich place such as Germany, Denmark, Hawaii, parts of Australia, Iowa, Texas or California where millions of EVs can serve as a convenient form of storage soaking up the sun or the wind for later use

Why is there so much interest in AEVs? Because automakers are increasingly rediscovering that they are not in the business of making and selling cars but in providing transportation-as-a-service.

For many, especially in congested urban areas, the aim is to get from point A to B, safely, quickly and cheaply. Who needs to own a car if you can get cheap mobility-on-demand?

In their book, Autonomy: The quest to build the driverless car and how it will reshape our world, Lawrence Burns and Christopher Shulgan estimate that car-hailing costs around 20 cents a mile compared to 65 cents/mile for the traditional own/operate a gasoline powered car.

Uber figures that human drivers account for 70-90 per cent of the cost of a typical ride. That explains the intense race to develop driverless cars – which are most likely to be shared rather than owned.

That explains why Google’s self-driving offshoot, Waymo, may be worth as much as $175 billion – 40 per cent more than GM, Ford and Chrysler combined.

Shell, BP and Total

Other clues – which are currently smallish, hence easy to miss – come from the big European oil companies, in particular Shell, BP and Total, who are gradually hedging their bets in a future where drivers will pull into a gas station not to buy gas but to recharge their electric batteries.

Shell has already made strategic investments into EVs, for example, by recently acquiring Ample, an EV charging company (Box). Total, it can be argued, has gone even further by getting into both renewable generation and electricity business – as reported in the June 2018 issue of this newsletter.

While these investments are miniscule compared to the overall investments of the oil majors, they are nevertheless significant. There is no reason to think that this is the end of it.

EVs – autonomous or otherwise – are not only imminent but are expected to reach the “tipping point” – where their upfront purchase price will match or beat internal combustion engines (ICEs) sooner than many people expect.

And once that point is reached, few people would want to buy the ICEs – or so the narrative goes.

Once demand for ICEs falls, so will the demand for oil – given that a good proportion of the global oil consumption goes to power the fleet of light to medium-duty cars.

When that happens, oil companies and major oil exporting countries such as Saudi Arabia will be forced to drop the price. This may reduce the decline in oil demand, but it will only go so far.

Moreover, once major global car companies – and countries like China – get into mass production of EVs, they will have many motives not to fall behind their peers. China, for example, is expected to sell 1 million EVs in 2018

Electricity prices, which will increasingly be fueling the EVs, are not only dropping, but may go negative at certain times in increasing number of places.

Clever EV owners, assisted by even more clever EV charging apps, can – at least in theory – charge their batteries when juice is plentiful and cheap, perhaps selling some of the juice back to the grid when prices are high and supplies are scarce – in the so-called vehicle-to-grid (V2G) mode.

Imagine a future in a renewable-rich place such as Germany, Denmark, Hawaii, parts of Australia,
Iowa, Texas or California where millions of EVs can serve as a convenient form of storage soaking up the sun or the wind for later use.

This will not only address the issue of negative prices but will give EV owners essentially free mobility which is also carbon-free.

You don’t have to be a tree hugger to like this scenario – and the price of gasoline can be ridiculously low, and it won’t really matter once millions have already invested in PVs and EVs plus distributed storage.

Moreover, once major global car companies – and countries like China – get into mass production of EVs, they will have many motives not to fall behind their peers. China, for example, is expected to sell 1 million EVs in 2018.

Norwegians are already buying more EVs than ICEs thanks to generous government subsidies. State of California is projected to have 5 million of them on the road by 2030, according to Governor Jerry Brown.

Several countries and cities have announced that they will ban sales of ICEs by 2025-2040. The momentum is favoring EVs and not ICEs.

Low gasoline prices will be a challenge for EVs, but even at low prices, the operating costs of EVs – fuel, maintenance and replacement parts – are likely to prevail and they offer superior performance, a smoother, quieter ride and zero tailpipe emissions in congested, polluted urban centers simply because they don’t have any tail pipes.

Investors

The third challenge, perhaps currently not on many fossil fuel company CEOs’ radar screen, is likely to come from investors, individual as well as institutional, who will increasingly exert pressure on who ever is managing their pensions and savings to wean off carbon-heavy investments.

Each of the three trends mentioned is powerful. Together, they are likely to be insurmountable. Oil, of course, will continue to be used in many other applications for many years to come. But if Big Oil loses a significant chunk of the lucrative passenger vehicle transport market, it will be greatly diminished.

Electricity’s fortunes, on the other hand, are on the rise, and so are those of renewables that will increasingly be generating power.

Editor’s Note

This article was first published in the September 2018 edition of Fereidoon Sioshansi’s monthly newsletter EEnergy Informer and is republished here with permission.